Weak data could set up Fed cut

Numbers would have to be 'ugly,' economists agree

WASHINGTON (CBS.MW) -- Two big economic reports in the coming week could set the stage for another intermeeting rate cut by the Federal Reserve.

The week's economic calendar is book-ended by the manufacturing survey from the National Association of Purchasing Management on Monday and the jobs report from the Labor Department on Friday.

"If both of the numbers turn out to be really bad, I could see the Fed cutting rates by Friday," said Sung Won Sohn, chief economist at Wells Fargo. "The numbers would have to be pretty bad."

"It will take ugly news on either Main Street or Wall Street to prompt an early ease from the Fed," said Stephen Slifer, chief economist at Lehman Brothers.

Neither expects the Fed to do anything before the May 15 meeting.

The two reports show just how split the economy is. Manufacturing is in a recession, while the labor market is still tight.

NAPM

The NAPM index is the first major indicator of March's economic activity.

In February, the index rose slightly to 41.9 percent from 41.2 percent in January. It was the first increase in 13 months, but the level remained far below the 50 percent level that marks the line between expansion and contraction in the factory sector. And the index remained below the 42.4 percent that signals a recession in the economy.

For March, economists surveyed by CBS.MarketWatch.com expect the NAPM to have improved to 42.2 percent. The number will hit the tape at 10 a.m. Monday. See our consensus forecast.

The NAPM is a diffusion index, so it measures not how strong or weak the sector is but how many companies are seeing improving or worsening conditions.

Attention on Wall Street has been riveted on the consumer confidence surveys, which tumbled in December, January and February before turning up in March.

However, Friday's drop in the purchasing managers survey from the Chicago region to 19-year lows reminded investors once again that manufacturing is where the problems lie.

"The crux of the problem is capital spending and profit growth ... or lack of it," said David Orr, chief economist at First Union.

The drop in the December NAPM was the catalyst for the Fed's surprise Jan. 3 rate cut, but Orr thinks it would take more than one bad number to get the Fed to act before its May 15 meeting.

"They're all set up to do nothing" for now, Orr said, even though he acknowledges that he's "in the camp that the storm is still brewing."

"Manufacturing is stabilizing," Wells Fargo's Sohn said.

"It does not appear to be getting significantly worse," said Lehman's Slifer. "While sales continue to slip, there are signs that the worst of the inventory cycle is over."

Jobs

The week's other big number is the March jobs report, due out at 8:30 a.m. on Friday.

Economists say the economy probably added about 84,000 jobs in March, down from the 135,000 increase in February. They say the unemployment rate will probably tick up to 4.3 percent from 4.2 percent. That'd be the highest jobless rate in 20 months.

Average hourly wages probably rose by a more moderate 0.3 percent after the somewhat frightening 0.5 percent in February.

"The March employment data will point to a steadily weakening labor market," Slifer said, predicting gains of about 105,000.

Manufacturing industries continue to shed jobs, perhaps by 90,000 in March. More than 400,000 jobs have been lost in manufacturing since August.

So far, service industries have more than made up for layoffs in manufacturing. And "as long as people have jobs, they'll spend," said First Union's Orr.

The other data to be released in the coming week won't impact the markets or the Fed very much.

Factory orders likely fell by 0.5 percent in February based on the 0.2 percent drop in durables reported last week. Construction spending likely rose 0.3 percent in February after the 1.5 percent gain in January.

The NAPM services index isn't followed nearly as closely as the manufacturing survey. It's likely to have strengthened to 52.2 percent from 52.2 percent.

Consumer credit probably rose by about $8.3 billion in February following the $16.1 billion rise in January.

Fed speak

The calendar of Fed speakers is crowded. Chairman Alan Greenspan testifies Wednesday on trade policy, but isn't likely to say much of interest to the markets after he passed on a chance in front of an economists group last week.

Other appearances by Fed Govs. Laurence Meyer and Edward Gramlich and bank presidents Anthony Santomero, Michael Moskow and Robert Perry aren't likely to shed much light, although Moskow is scheduled to specifically address the economic outlook on Wednesday.

Even if both the NAPM and jobs report are particularly weak, the economists we spoke to don't think a rate cut is likely in the coming week.

"My feeling is that if the Fed wants to cut rates, they'd do it at mid-month," Sohn said, following the release of the March retail sales, inflation and industrial production data.

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